No British government ever wishes to be seen as soft on immigration. That's particularly true of a government that is trailing consistently badly in the opinion polls and whose reputation on immigration is one of its few remaining strong suits with the voters – both of which are true of David Cameron's government. This basic – and base – political calculation provides the background explanation for – even if it does not excuse – the coalition government's general determination to slash student visa numbers and its specific preference for a zero tolerance approach towards the 2,700 overseas students caught by last month's sudden ban on the teaching of non-EU foreign students by London Metropolitan University. The callous treatment of those students is a disgrace both to the government and, more worryingly, to Britain's wider reputation as a world-class university destination.

It is no secret that both the general issue of student visas and the specific one about LMU have caused major rows within the government. In both cases, the business department has been pitted against the Home Office, and in both cases, the Home Office has prevailed. On Thursday, however, the business department announced a more sensible and less fear-driven long-term approach to overseas student numbers. As a result, perhaps some good may come from last month's bad decision over LMU, though that may be little consolation to those caught up in the consequences.

Both the business secretary Vince Cable and the universities minister David Willetts have addressed this week's Universities UK conference at Keele University, and both have tried to strike a more positive note. Both have a difficult task. The international reputational damage caused by the LMU ban and its consequences for the universities are very bad. This has been particularly serious in both India and China, where the distinction between LMU and London University is not always understood. As a result, the impression that foreign students are unwelcome in London as a whole has been particularly damaging, just at the time when the Olympics have done so much to make the capital so attractive.

The damage is not just reputational but financial. Foreign students pay average fees of about £10,000 a year and spend at least that amount while they are here. They bring in almost £8bn a year to the UK. A large cut in foreign student numbers would not just be damaging to the finances of Britain's universities. Almost all rely on a significant income from overseas fees. A cut would increase the financial pressure on home-grown students too, as the colleges struggled to offset their loss of overseas income. Be clear also that cutting foreign students makes this country more boring, more insular and more ignorant — as Mr Willetts himself said.

This is a big public issue. Encouragingly, Mr Willetts told the university heads something they wanted to hear: that the government wants to – wants to, note, not will – publish disaggregated immigration statistics that make clear the difference between students entering and leaving the UK for legitimate educational reasons, and other categories of migrants. This may seem a dry proposal at first sight. But it could pave the way for a more informed debate and, better still, for a clearer differentiation that may safeguard universities and their legitimate students. Labour should back Mr Willetts on this.

That foreign students should have proper visas, should attend proper courses in proper colleges, should speak decent English and obey the terms of their immigration status ought to be common ground. But so should the principle that Britain and its universities should be able to recruit students on merit. The LMU debacle has been a miserable episode and much remains to be done to help LMU's foreign students and protect the reputation of foreign student programmes here more generally. But there was some hope on Thursday that, having lost a battle, the business department may eventually win the war.